Can an employee take legal action and claim damages where they suffer a psychological injury arising from the manner of their dismissal? The High Court recently answered yes.

This case concerned the availability of damages for a psychiatric injury to an employee in circumstances where the injury arose from the manner of the employee’s dismissal.

Mr Elisha was employed by Vision Australia Ltd (“Vision Australia”) in September 2006. In March 2015, Mr Elisha was involved in an incident while staying at a hotel during travel for his work duties. The circumstances of the incident were disputed. The incident was reported to Mr Elisha’s manager, who, in email correspondence with Vision Australia’s human resources staff, stated that she was “unsurprised” by the allegation given previous reports of allegations of aggressive behaviour.

On May 19, 2015, Mr Elisha met with his manager who told him there was a “serious” complaint against him and gave him a “stand down letter” that required his attendance at a meeting two days later. The letter stated that the meeting would be conducted in accordance with the Vision Australia’s enterprise agreement and enclosed the “Vision 2015 Disciplinary Procedure” (“2015 Disciplinary Procedure”). The allegations set out in the stand down letter related only to the alleged misconduct during the hotel stay.

At the meeting, Mr Elisha denied the allegations in the stand down letter. The next day, during a meeting of Vision Australia management staff, including Mr Elisha’s manager, a recommendation to prefer the hotel proprietor’s account of the hotel incident over Mr Elisha’s account was accepted. That decision (to prefer the hotel proprietor’s account) was informed by previous allegations of aggressive behaviour by Mr Elisha. However, they were never put to Mr Elisha at the meeting.

Mr Elisha’s employment was terminated on May 29, 2015, and he was subsequently diagnosed with a major depressive disorder. In August 2020, Mr Elisha commenced proceedings claiming damages for his psychiatric injury.

The primary judge characterised the disciplinary process as “a sham and a disgrace” and held that Vision Australia breached the 2015 Disciplinary Procedure, which was incorporated into Mr Elisha’s employment contract.

The employer failed to provide Mr Elisha with a letter containing the allegations upon which Vision Australia ultimately acted in terminating his employment.  This was procedurally unfair to rely on information that the employee had no chance to respond to, and perhaps was not even relevant.

The primary judge awarded damages for breach of contract, concluding that the risk of psychiatric illness was not too remote. The primary judge rejected Mr Elisha’s alternative claim for damages for breach by Vision Australia of a duty of care to provide a safe system of investigation and decision making with respect to discipline and termination of employment. That the claim relied upon a duty of care that was not recognised at law.

The employer appealed. The Victorian Court of Appeal allowed Vision Australia’s appeal on the basis that damages for psychiatric injury were unavailable for a breach of contract other than where the psychiatric injury was consequent upon physical injury caused by the breach and that Mr Elisha’s psychiatric injury was too remote from Vision Australia’s breach, that is, the employer could not be held responsible for the injury as the connection was just too tenuous.

The High Court found that Vision Australia’s contention that the 2015 Disciplinary Procedure was not incorporated into Mr Elisha’s employment contract was incorrect and held that psychiatric injury is part of a category of physical or personal injury for which damages are recoverable for breach of contract.

Interestingly, the scope of a contractual duty is determined by reference to the nature of the liability that the parties might fairly be regarded as having been “willing to accept” in their relationship. The employee’s loss was not too remote because the kind of damage suffered (psychiatric injury) and the general manner of its occurrence was within the reasonable contemplation of the parties, at the time of the contract, as a serious possibility.

Lessons for employers

In effect the High Court said that employers should have in mind that if the employment contract was breached in terminating the employee then damages can flow from injury.

When counselling or disciplining an employee, even up to suspension or termination from employment, make sure that you properly apply any policy or applicable agreement to avoid any unfairness to the employee. Proper application of these underlying employment documents will assist you to follow the law and avoid any potential risk of serious consequences.

Before taking action ensure that you also are approaching the process from a non-biased perspective – do not bring a mindset to the process that does not have an evidentiary foundation. It will be unfair and affect the outcome of the legal process, which could lead to the employee being reinstated to employment or the company paying out potentially significant damages.